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Dividing Retirement Accounts

Dividing Retirement Plans: To QDRO Or Not To QDRO

Dividing Retirement Plans: How do we value them, and how do we divide them? What is a QDRO? The first thing you have to do is figure out what kind of retirement account you andyour spouse  have. There are several kinds of retirement accounts/benefits:

Social Security. A court cannot divide Social Security. However, it can – and in the right divorce might– order one spouse to pay maintenance to the other from Social Security. This is a little technical; it depends on how long you have been married, among other things. Some information from the Social Security website is here. Most of the time, the court will not divide it; but it may well be a factor in the court deciding an unequal division of property.

Defined Benefit Plan. This is more commonly called a “pension”. This is a right to get monthly payments, of a certain amount, for the rest of your life, after a certain age (usually 65).  We usually see pensions in Boeing employees; State employees; Military; and union workers such as Teamsters, IBEW, and SIEU workers.  A court can divide the community portion (that was earned while you were married and/or living together) between the parties.  They are becoming less and less common; but they are valuable: they promise you a set monthly amount, once you retire, for the rest of your life. An example of a QDRO that divides a Boeing pension is here.  There are several ways that such plans are different from Defined Contribution Plans: you can’t cash them in before you retire, or take loans against them, or transfer them to another account if you leave the employer. You cannot leave it to your children. They are not invested in the market, and grow, if at all, only through COLA or something similar. You get only a certain amount each month, when you retire; you typically cannot control how much you take out. BUT – and it is a huge and valuable but – the money will last until you die.

Defined Contribution Plan. This is a plan where the employer – or you – put aside a certain amount, pretax,  each month, and your employer matches your contribution (again, pre-tax).  The IRS has the standard definition and a list of kinds of plans. This is usually a 401K; a403(b);  an IRA; a SEP-IRA; a Roth IRA. This is NOT a pension. Here, a court can also divide the community portion of the 401K.  The amount a spouse contributed before the marriage, plus any increase in that amount from market changes, is separate property and normally a court will not divide that.  If I am handling the divorce, I will frequently hire a CPA to calculate exactly how much that is.  If you are not sure what you have, it is probably a Defined Contribution Plan.

How Do I Value A Retirement Plan?  That depends on what kind of a plan it is.

Defined Contribution Plans. One fairly simple way of valuing  is this:

Assume you have a 401K in EE Jones, and you started it in 2000; got married in 2004; and kept on contributing to it ever since. If it is a 401K, or an IRA, you would look at what the value was at the time of marriage. Then you would look at the plan  site, and figure out what the growth was over time.  The community portion is the remainder. For example: let’s say at marriage (January 1, 2004), you had $50,000 in the 401K.  Now (June 2015), it is worth $150,000, which includes both market appreciation plus contributions. The EE Jones website says that Plan had a 7.0% annualized growth from January 2004 to now. (June 2015, or 9.5 years).  Growth in a 401K is compound growth, not simple interest,  so you have to figure the compound growth. The remainder is the community interest.  So in our example, the separate share is $108,926, and the community share is $41,074. For example:

Year Balance Interest End Balance
2004 50,000 3,500 53,500
2005 53,500 3,745 57,245
2006 57,245 4,007 61,252
2007 61,252 4,288 65,540
2008 65,540 4,588 70,128
2009 70,128 4,909 75,037
2010 75,037 5,253 80,289
2011 80,289 5,620 85,909
2012 85,909 6,014 91,923
2013 91,923 6,435 98,358
2014 98,358 6,885 105,243
2015 (1/2) 105,243 3,683 108,926
Current Balance: 150,000
Separate Amount: -108,926
Community Amount: 41,074

Defined Benefit Plans. The problem with valuing a pension, is that it has no cash value, in reality. It is a right to get a stream of payments, every month, once you turn 65, until you die.  So there is no immediate cash value. (Normally. State SERS and other pension plans do have “cash” values set by the state; those are special cases.)  So you have to do something called a “Net Present Value” calculation, which takes the stream of payments for your assumed lifetime (based on actuarial tables); discounts each payment by a certain discount factor (usually 4-5% per year), and adds all of the values together. That results in a “number”.  We only do that, in divorces, where we are trying to keep the entire pension with one party, and need to trade it off against another asset (like a house.)

How Do I Divide A Retirement Plan?   Dividing a retirement plan depends on what kind of plan it is.

Dividing an IRA is usually pretty simple. Call the administrator; they will have a form to fill out. Your spouse opens an account at the same bank. You get and send them a copy of the Decree where your spouse is awarded some portion of the IRA; they transfer the amount over to her account; and then it is hers to do with as she wishes. If she cashes it out, she pays the fines and penalties. Otherwise, it is a non-taxable event; as long as she leaves it in an IRA, there are no tax consequences.

BUT dividing a 401K is a different problem. That requires a “Qualified Domestic Relations Order”. (A “QDRO”.) I do those. Those are separate orders, that have to be drafted by the attorney and approved by the pension administrator. They are not hard to do; but they do require some extra work.  A sample QDRO is here.  Every QDRO is different, because every pension administrator has their own rules. It is very very important to have the QDRO approved, if at all possible, by the fund administrator before getting the court to sign it. You can usually get the contact information for the QDRO POC by contacting your payroll or HR department; they will know what you are asking for.

AND dividing a pension is a different problem as well.To divide a pension as the court would do it, requires a special formula called a “Bulicek formula”, after a major Washington case called In re Marriage of Bulicek, 59 Wn. App. 630, 638-39, 800 P.2d 394 (1990). That formula is:

Total months of Service During Marriage Monthly Benefit 1/2 x __________________________ x Total Months of Accredited at Retirement Service at Retirement Date.

Although many times, in agreed divorces, people just end up dividing the current entitlement in half. But it is still done via a QDRO.

Dividing Washington State Retirement Plans.  There are a LOT of different state retirement plans: LEOFF 1 and LEOFF II; PERS I and PERS II; etc. There are also a lot of municipal retirement plans as well. The State has its own Department Retirement Orders, that need to be signed by the court and approved by the State. The link to the State’s website is here; and a sample DRO is here. That, again, requires some additional work on my part, but it is well worth while.

If there are retirement plans involved – call me with questions.  There is no substitute for talking to an experienced attorney!

Some of The Case Law And Citations:

Trial court must consider a party’s salary increase, received shortly after separation, in calculating community share of present value of monthly pension where there was no evidence that increase was not result of community efforts.
In re Marriage of Hurd, 69 Wn. App. 38, 848 P.2d 185, review denied, 122 Wn.2d 1020 (1993).
A party’s reduced probability of enjoying pension benefits due to poor health may be a factor in valuing a pension, using a life expectancy other than from a standard actuarial table. The evidence, however, must be more accurate than a standard actuarial table, and the best evidence would be particularized expert opinion testimony on the life expectancy of the particular pensioner.
In re Marriage of Pilant, 42 Wn. App. 173, 180, 709 P.2d 1241 (1985)
Pension benefits earned before marriage or after separation are separate property and are excluded in the valuation of the pension.
In re Marriage of Manry, 60 Wn. App. 146, 149, 803 P.2d 8 (1991);
In re Marriage of Donovan, 25 Wn. App. 691, 694, 612 P.2d 387 (1980)
The community share of a pension may include increased benefits attributable to salary increases following dissolution, but not increases due to additional years of service.
In re Marriage of Harris, 107 Wn. App. 597, 602, 27 P.3d 656 (2001);
In re Marriage of Chavez, 80 Wn. App. 432, 437-38, 909 P.2d 314, review denied, 129 Wn.2d 1016 (1996)
Pensions, when apportioned between the parties, should use the Bulicek formula.
In re Marriage of Rockwell, 141 Wn. App. 235, 251-54, 170 P.3d 572 (2007);
In re Marriage of Bulicek, 59 Wn. App. 630, 638-39, 800 P.2d 394 (1990).